Podcast Summary: The Path to Exit – Episode 16

Title: Generating & Evaluating Interest from PE Firms
Host: Mike Lyon, Vista Point Advisors
Guest: Russell Perkins, Vice President, Vista Point Advisors
Release Date: April 23, 2024

Episode Overview

This episode dives into the key issues technology founders face when fielding the barrage of interest from Private Equity (PE) firms, especially as their companies grow toward an eventual M&A transaction. Host Mike Lyon and guest Russell Perkins discuss best practices for generating excitement among PE firms, critically evaluating potential investors, managing data sharing, and avoiding pitfalls commonly encountered in these high-stake conversations.

Key Discussion Points & Insights

1. Getting PE Firms Excited on the First Call

• Lead with Market and Product Story:
  • Focus on your product, market opportunity, and origin story when introducing your business.
  • Create the impression of high market interest to spark competitive tension among investors.
  • Frame software businesses as "high margin and recurring revenue" to pique investor interest.
• Positioning is Key:
  • What excites customers can raise red flags for investors. For example, terms like "customizability" and "pick-your-pricing" appeal to customers but can sound like costly complexity to investors. Instead, pitch "cheaply configurable" or "automated upselling."
• Tip: Save detailed financial disclosures or shortcomings for later conversations; if issues do arise, frame them as future opportunities.

"An investor is trying to see if you as an entrepreneur seem backable, someone who's optimistic, reasonable and can deliver."<br> — Russell Perkins (01:09)

2. Assessing Investors on the First Call

[Timestamps: 02:33–04:28]

• Do Your Homework First:
  • Review the investor’s website for sector focus, relevant portfolio companies, and team structure.
  • Understand whether you're talking to a junior or senior team member, as motivations and information quality can differ.
• Ask Probing Questions:
  • Inquire about their investment criteria, non-negotiable metrics, and sector-specific experience.
  • Don’t be shy about asking what their decision process looks like and how your company fits their philosophy.

"Incentive structures for these calls can sometimes be a little bit different depending [on] seniority levels."<br> — Russell Perkins (03:13)

3. Prioritizing Which PE Firms to Engage

[Timestamps: 04:28–06:16]

• Avoid Time Sinks:
  • Don’t just respond to the most persistent or slickest inbound emails. Instead, focus your time on 3–5 high-potential firms.
  • Leverage existing relationships, external recommendations, or advisors to refine your shortlist.
• Categories of Firms:
  • Understand how investors classify themselves: premium, mid-tier, or value-based.
  • Be aware of the difference in approach between a pure software investor and firms that mix software with service or internet businesses.

"There can be a really big difference between an investor that looks at software businesses [and] ...a pure software buyer. They're going to be focused on different things."<br> — Russell Perkins (05:20)

4. How Much to Share on a First Call

[Timestamps: 06:16–08:31]

• Guard Your Data:
  • Avoid sharing forward-looking financials or granular customer-level revenue data too early.
  • If compelled to share, stick to historical financials at a high level.
  • Consistency in data sharing builds trust—only reveal details once you’re serious about a transaction.
• Metric Focus:
  • Early conversations should center on product and market metrics. Only discuss financials when truly necessary and always with proper context.

"We really think that pre-NDA you want to lean a little bit more towards market and product metrics versus financial numbers."<br> — Russell Perkins (07:00)

"Not giving a private equity investor the RBC data—revenue by customer data—upfront is key... If you just give them the raw data, they're going to come back with a really different analysis that implies a lower valuation."<br> — Mike Lyon (08:31)

5. Navigating Valuation Conversations

[Timestamps: 08:31–11:07]

• Ask Smart, Open-Ended Questions:
  • Avoid asking directly, “What would you pay?” as most will dodge or tell you what you want to hear.
  • Instead, ask about “best in class” metrics, recent industry multiples, and their evaluations of similar companies.
• Beware of Placeholder Offers:
  • Early stage, data-light valuations are rarely meaningful and often serve simply as hooks to move you into exclusivity.
  • Sizable diligence is always required before a genuine, actionable offer.

"A lot of firms will use offers to get you into exclusivity and then figure out what you're worth later. And that doesn't always result in the optimum outcome."<br> — Russell Perkins (10:32)

6. Debunking the Myth of a 'Quick Deal'

[Timestamps: 11:07–13:07]

• No Such Thing as Fast and Easy:
  • Many PE firms push the idea that avoiding a competitive process saves time, but all deals require detailed due diligence, regardless of initial speed.
  • Direct-to-founder approaches often serve to sidestep competition, leading to less favorable outcomes for the seller.

"The key thing to remember is that there is no quick and easy deal. It's going to be the same amount of diligence work on your end."<br> — Russell Perkins (12:23)

Notable Quotes & Memorable Moments

• "Functionally these may mean similar things to you, but positioning wise they can be very different."
  — Russell Perkins (01:56)

• "They're really good at selling this myth of a quick deal... This really isn't true because it takes a certain amount of time to get a transaction done and a lot of it's focused around diligence."
  — Mike Lyon (11:41)

Timestamps for Key Segments

• 01:09 – Russell on what excites investors in initial calls
• 02:33 – Mike on audience framing: what customers vs. investors want to hear
• 03:13 – Russell on how founders should prepare for investor calls
• 05:20 – Russell on differentiating investor types and why it matters
• 07:00 – Russell on how much data to share pre-NDA
• 08:31 – Mike emphasizes importance of controlling how you frame retention and customer data
• 11:07 – Mike and Russell on handling valuation discussions
• 12:23 – Russell on the myth of a quick deal

Conclusion

This episode delivers actionable advice to technology founders navigating the flood of private equity interest. Core takeaways include the importance of positioning your business appropriately, being deliberate in your investor conversations, controlling data disclosure, and not falling for the myth of a fast, painless deal. Throughout, the tone is practical, founder-centric, and candid about the industry's realities, arming listeners with both strategy and key tactical “dos and don’ts” for successful PE engagement.